If citizens of di¤erent countries belonging to an economic union adhere to di¤erent and deeply rooted cultural norms, when these countries interact they may …nd it impossible to agree on e¢ cient policies, especially in hard times. Political leaders are bound to follow policies that do not violate their country's cultural norms. This paper provides a simple positive theory and a compelling case study of the Euro area crisis to highlight the importance of cultural clashes when economies integrate. We also provide a normative argument about the desirability of institutional integration: a political union, with a common enforcement agency, is the more bene…cial the greater is cultural diversity in an economic union.Keywords: Cultural Norms, Institutions, Euro Area, Crisis Mismanagement.
JEL classi…cation numbers: D72This paper previously circulated under the title "A Cultural Clash View of the Euro Crisis." We thank two anonymous referees as well as Sascha Becker, Alberto Bisin, Serra Boranbay, Francesco Giavazzi, Gilat Levy, Assar Lindbeck, Elias Papaioannou, John Patty, Giacomo Ponzetto, Andrei Shleifer, Enrico Spolaore, Francesco Squintani, Livio Stracca, Sebastian Turban, Philippe Weil and participants at various workshops for great suggestions and comments. The usual disclaimer applies.